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energy and climate change policy in the UK Parliament from Alan Whitehead MP

Interconnection: small perturbations in a flat line graph

There has been a veritable flurry of activity on the interconnector front over the past couple of months. No interconnectors as such, or even the prospect of new interconnectors in the near future, but quite a deal of fluffing of feathers and (sort of) discreet nest building moves that suggest that maybe there might just be something in it all.

There was the departmental paper ‘More Interconnection: Improving Energy Security and Lowering Bills’ in December. Before that, The Guardian reported in October that the Icelandic President was getting very excited about a possible 1000km interconnector following the signing of a statement of intent between the UK and Iceland. Such an interconnector could supply perhaps 1.5% of the UK’s electricity needs by the early 2020s. There was a proviso on his excitement however: that the UK would guarantee the cost of £4.3bn for the line to be laid and connected.

Then this month, in a less than generally noticed footnote to his letter to Ofgem about gas prices, Ed Davey asked Ofgem to ‘indicate what benefits there might be for competition and for consumers from further steps towards completion of a Single European Energy Market of which interconnection could play an important part’.

Ofgem doesn’t count interconnection as part of our national supply margin because, well, interconnection could go two ways, although analysis of the Brit-Ned interconnector last year showed that 99% of the time flow was into the UK. If it did count it, the regulator cheerfully records, the doomy-sounding 5% margin in 2015 would look like a far healthier 10% gap. So imagine what a relatively easily achievable doubling of interconnection would look like. You might even not have to build quite so many new gas fired – or even nuclear – powered plants in the future.

So why the snail-like progress because of course you couldn’t even start to argue that an Iceland interconnector might go two ways – what would a country that can hardly move for hydro power and a population the size of Cardiff want with ever importing electricity? The clue, I think, is in the Icelandic President’s reported ‘ask’ of the UK government: that the project is somehow underwritten in order to go out to tender. Tricky, because in recent years the assumption has always been that interconnectors should essentially be ‘merchant undertakings’ at no risk to consumers. Furthermore it was assumed that the money to pay off the investment should come from what the December DECC strategy paper calls ‘price arbitrage opportunities’. Another way to put it is that interconnectors should make their living out of speculation as to price differentials between the UK and Europe. But with moves towards a more integrated and liberalised European energy market the likelihood of these differentials decreases. Perversely therefore, greater connectivity on a merchant basis and a level energy playing field means a lower likelihood of additional interconnection being achieved. The full bullet point in the DECC strategy paper incidentally, reads: ‘questions as to whether price arbitrage opportunities adequately capture the benefits of interconnection including security of supply’.

So the little flurry of late is therefore pretty interesting. Because, as can be seen in the language of Ed Davey to Ofgem and in the way the case for interconnection is put in the strategy paper, it is apparent that feelers are being put out towards a different way of doing things. Stupid question I know but could it be that ‘arbitrage opportunities’ really do not reflect the value of interconnection to UK security of supply, and that, subject perhaps to EU competition regs (see ED’s coded reference in his letter to Ofgem above), a real case might be made to underwrite such projects from the public purse? That probably wouldn’t be difficult, since the EU has recently designated no fewer than three UK-continent interconnection proposals as ‘European projects of common interest’. This designation is not a million miles from what the UK Government has tried to put to the EU Competition Commissioners about another project not likely to come on stream until well after a number of interconnectors could be up and running, namely Hinkley C power station. That project will have tax breaks and an underwritten power price behind it but a problematic route to travel with EU Competition Commissioners. Interconnection, on the other hand, currently has no assistance of any sort riding on it but does have a loudly banging and waving open door from the EU.

As I’ve said, it’s a clear no-brainer and wildly in the national – and EU – strategic interest to pursue. It just needs a little prejudice-swallowing to get going quite rapidly. And sort of well done to DECC for beginning to raise the possibility of such a turn around, albeit in deep code. It would be good just to get underwriting in the public interest out in the open and get on with it, though, wouldn’t it?